Leading global consultancy partnership Kearney has today released new study showing that the proportion of global ‘zombie companies’ – active companies unable to meet interest obligations with operating profit for three consecutive years – grew 5% over 2022.
Dawn of the Debt: Will higher interest rates doom more zombie companies? reveals that whilst the number of zombie companies has risen year on year, particular industries note very different trends. The aviation industry exhibited a zombie share of 3.2% in 2021, rising to 26.1% in 2022. Conversely, high profits from soaring energy prices led to a 13% decline in zombie companies in the energy sector in 2022.
The research analyses 70,000 globally listed enterprises across 180 industries and 153 countries. The data set includes more than 5 million individual data points and covers information from 2000 to present day.
Given the skyrocketing interest rates seen across most of the globe over the past two years, Kearney also conducted two stress tests on the companies included in the research, determining the level to which 1.5 times or 2 times interest expense increases would affect the number of zombie companies. A 1.5 times interest expense increase would grow the number of zombie companies by 15.6% and a 2 times expense hike would increase the total by over a fifth, 21.5%.
Worldwide development of zombies
Beyond the raw numbers, the implications of this increase in zombie companies are clear. In 2022, 2.1 million employees worked at zombie companies, four times higher than in 2021. Similarly in 2022, global economies allocated close to $1 trillion in capital to zombies – twice as much as in the previous year –, thereof $790 billion in debt and $200 billion in equity capital.
With more companies falling under the ‘zombie’ definition, more previous zombies are also going out of business. In 2022, 11% of existing zombies went out of business compared to 7% in 2021. Reinstatement of previously-suspended insolvency rules paused during the COVID-19 pandemic, may have had an effect here.
However, Kearney expects the rate of ‘zombification’ and failure of zombie companies to increase over the coming years in line with interest rates, should any further rises be implemented. Companies that will need to refinance fixed-rate loans over this period will face higher rates, adding to costs and increasing the likelihood that they qualify for zombie status.
Nils Kuhlwein, Partner & Managing Director, Head of Service Line Restructuring at Kearney said, “Given the turbulent global economic situation, it’s not surprising that the number of zombie companies has risen in this most recent edition of our research. But that is not to say that this isn’t concerning. Companies unable to pay interest obligations through current profit are in a precarious position and it’s not enough to wait for the markets to change.
“Affected businesses will need to act now in order to claw their way away from the grave, and wider industry must take note of these examples of the ‘walking debt’ in order to adapt their own strategy.”
Alberto Fumo, Partner & Global Lead, Private Equity, Mergers and Acquisitions, and Transformations at Kearney, added, “Rising interest rates across much of the globe have placed a significant amount of pressure on businesses, but our stress tests in this edition of our zombie company research have made clear that it could be much worse.
“Some sectors are proving more resilient, some are showing real strain. The important thing will be to regenerate their business models and adapt quickly, to reduce the effect of any actual further rate hikes before they come into force.”